Microsoft (NASDAQ: MSFT) earnings released yesterday for the second quarter proved you can’t underestimate the power of a workplace software monopoly. Thanks in large part to the success of Microsoft Office product – the ubiquitous word processing and spreadsheet programs literally every business uses – the company tallied earnings per share of 77 cents and operating income of $8.17 billion. That’s 13% higher than EPS forecasts.
Sounds great, except for one thing… MSFT stock is in the red across the last 12 months, is underwater year-to-date in 2011 and is off more than -4% in the last five days. So what gives? Is Microsoft stock oversold, or are investors justly unimpressed?
Well a look at the Microsoft earnings report shows signs to be optimistic. First off, Microsoft Business Division saw its revenue leap 24% year-over-year. Office 2010 is the fastest-selling consumer version of Office in history, with license sales over 50% ahead of Office 2007. When you consider how entrenched the software is after almost 20 years of dominance, that revenue jump is very impressive.
It’s also worth noting that Microsoft announced it has now sold over 300 million Windows 7 licenses, and that the OS is now running on over 20% of Internet-connected PCs. That’s not a true measure of market share because it leaves out Mac computers from Apple Inc. (NASDAQ: AAPL), which have been gaining momentum, as well as computers that aren’t counted by the MSFT web tally, but a pretty nice number after Vista OS seemed to fall flat.
On top of that boost from Office and Windows sales, MSFT got a punch from the sales of 8 million Kinect motion controllers for the Xbox 360 gaming console. There also was the launch of the Windows Phone 7 smartphone platform, which while too young to add to the bottom line is a significant source of hope within Microsoft as the company tries to tap the mobile market. When you couple strong business spending with strong demand for this consumer product, the result is a good showing for Microsoft.
On top of that, in the wake of earnings Microsoft saw a rash of analyst upgrades in the last several days. Specifically:
- FBR Capital set a new target of $30, above $28 previously, with a “market perform” rating on Microsoft stock. That’s a nearly 10% upside.
- Morgan Stanley is now giving MSFT an “overweight” rating and a $32 price target on the stock. That’s a 15% upside.
- ISI Group upped its MSFT target on shares of Microsoft Corp from $32 to $33 with a “buy” rating. That’s a 20% upside.
- Oppenheimer raised its price target on shares of Microsoft from $32 to $36 with an “outperform” rating on the stock. That’s 30% upside.
Not only are each of these price targets reflective of decent gains, but its worth noting that every one of these analysts had a price target above current valuations for Microsoft BEFORE boosting their target recently.
Strong earnings coupled with positive forecasts seem to make a compelling case for Microsoft. If you can get past the recent sluggish share price, that is.
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This article was written by Jeff Reeves is editor of InvestorPlace.com. Follow him on Twitter via @JeffReevesIP. As of this writing, he does not own a position in any of the stocks named here.